Bitcoin is a peer to peer, cryptocurrency created in 2008 by a mysterious and unknown character named Satoshi Nakamoto. It is called peer to peer because all the computers that are mining for cryptocurrency are in a peer to peer network which allows them to easily talk to one another. It is called cryptocurrency (cc) because of how it is acquired.

Cryptocurrency is a little bit like a mineral like gold, copper silver etc. The way you mine gold is my digging in the ground, looking for something shiny, then testing to make sure that it is gold. To mine cryptocurrency your “shovel is a computer that can add/subtract/multiple and divide and your testing kit is a an internet connection so that your computer can talk to all the other computers that are also mining. Instead of digging in the dirt, to find something that looks like a bitcoin, your computer trys to solve a pretty difficult math problem that has many correct but not an infinite number of correct answers. Since there is a finite number of correct answers, every bitcoin that is found means one less bitcoin to find.

Once your computer thinks that it has found a correct answer, it will ask the asks all the other computers that are also mining for bitcoins if it is correct answer. When 51% of the mining computers agree that an answer is correct, the mining computer is awarded a Bitcoin by the network.

Here is an example. Lets say that the correct answer to match question to be awarded a bitcoin is “What is a whole number between 1-99 that ends in a zero.” The correct answers would be 10,20,30,40,50,60,70,80,90. If our computer started mining, in this case counting from 1-99, when it hit 10 it would realize that it found a correct answer. It would then ask all the other computers that are mining if 10 is a correct answer. Once a majority of those computers agree that 10 is a correct answer your computer would get a bitcoin and no other computer could ever be awarded a bitcoin for finding 10.

Buying and selling with bitcoins

Every bitcoin or fraction of a bitcoin starts life the same way – as a hidden number that must be “found” by a computer that is mining (doing calculations) to find bitcoins. Once a bitcoin is found it is placed in a digital “wallet”. It stays in the digital wallet. If the owner wants to sell, give or trade bitcoins (or a fraction of bitcoins), they typically enter the number of bitcoins to send, and the recipient’s bitcoin wallet address (likely a long string of numbers and digits). Then they press a button and the bitcoins are transferred through the bitcoin network to the recipient’s digital wallet. There are many reasons cited as benefits for buying and selling with bitcoins rather than currency or credit. Some of the most popular are:

(1) The transactions are anonymous. In the “real” world you can walk into a store wearing glasses, a hat a long coat and buy something with cash and be pretty anonymous. This is not really an option online since almost all transactions require a credit card or bank account. Bitcoins and other crypto-curriences level the online playing field by allowing the buyer to pay for goods and services online without revealing his or her identity.

(2) Also transaction fees are typically less than other digital or credit options. Credit card and debit transactions can range from 2% to 10%. Bitcoin transaction fees are typically less than 1%. Many are are low as .02%. Those signs that say “we charge $.50 for a debit card transaction under $10 (a 5% fee) would be more like we charge $.02 to .$.10 for bitcoin transactions under $10.

(3) It is extremely (if not impossible) to counterfeit bitcoins because validity requires over 50% of all the computers mining bitcoins to agree that a bitcoin is real. That is like having every person look at every bill and only if a majority agree will it be considered a “real” dollar.

Bitcoin mining is decentralized banking.

In a centralized banking economy money is created by a central authority and distributed through banks and direct programs. In the Bitcoin decentralized banking economy anyone can create money directly without exchanging something like goods and services for money.

When you make Bitcoins, you take Bitcoins.

Right now anyone with a few thousand dollars and a little bit of technical know-how can create Bitcoin by mining. The fundamental bargain is if you want to make Bitcoins by mining, you must also agree to process Bitcoin transactions. The creation of the currency and the network to transact the currency are one in the same. Every computer that is mining Bitcoins is also handling Bitcoin transactions. In a centralized banking economy, money transactions are primarily handled through 3rd party payment processors.

Every computer that is mining Bitcoins strengthens the Bitcoin community by increasing demand for Bitcoin (by mining) and improving the efficiency and power of the exchange network (by handling transactions). When you dedicate your computer to mining you become a bank and payment processor in one.

Patrick M. Byrne the CEO of Overstock and described “Scourge of Wall Street”recently posted a cover letter and Wired magazine article on the Overstock.com website. The letter and article detail his struggles with Wall Street since Overstock went public in 2002, and why he is pro-Bitcoin. Read the cover letter and Wired article here.

Tuesday, the New York State Department of Financial Services said it would be accepting and reviewing proposals and applications for New York State based virtual currency exchanges.

According to the order signed by New York’s Superintendent of Financial Services Benjamin Lawsky “Firms may immediately submit formal proposals and applications to operate virtual currency exchanges in order to help expedite the process of putting in place greater oversight for this industry.”

The Department also announced that it would propose regulatory guidance on virtual currencies “no later than the end of the second quarter.” Read the Order here.

Mt. Gox released an update via their website today that they are going to implement a 6-hour downtime on all Bitcoin deposits and internal Bitcoin transfers in order to implement their solution to the “transaction malleability” issue. The downtime is scheduled for 6pm ~ 12am JST (February 15th)”.

The announcement states that Mt.Gox’s solution would resolve the issue short term while the Bitcoin Core Dev team and the Bitcoin Foundation work on the long term solution. Read the release here. As the traditional market price leader for Bitcoin. The community is anxious to see if Mt. Gox’s Bitcoin price (now trading at about 60% of BTC-E) recovers once normal operations and Bitcoin withdrawing resumes.

The Bitcoin Blockchain is the shared ledger of all Bitcoin transactions. When you send Bitcoin what you are actually doing is updating your copy of the Blockchain with a new transaction and sharing your updated version with other computers on the Bitcoin network. Each computer reviews the new entries in the Blockchain for accuracy. As long as 51% of the copies of the Blockchain are legitimate, your copy will continue to be legitimate as long as your computer is not compromised.

The 51% attack

The Achilles heal of Bitcoin is the 51% attack. If nefarious Bitcoin miners control over 50% of the Blockchain they can in theory create an illegitimate copy of the Blockchain which will eventually be accepted as the real Blockchain by all the computers on the network. Most of us have thought that as more computers mine Bitcoins, this becomes harder to accomplish. However mining pools can threaten this balance. A mining pool is a collection of Bitcoin mining computers that act as one. When a computer joins a mining pool, the computer gives its computing power to the pool in exchange for a proportional amount of the Bitcoins mined by the entire pool. The administrators of the pool can basically control what Bitcoins are granted to each computer and details of the Blockchain copy on that computer.

ASIC computers have changed the game

Over the last six months ASIC computers have come on the market and have dominated the mining of Bitcoins. Right now a relatively low percentage of the computers mining for Bitcoins are ASIC and they control a usually large percentage of the computing power mining Bitcoins. Recently a mining pool has become so powerful that it threatens to control over 50% of the computing power mining for Bitcoins. If this does happen, the dreaded 51% attack can become a reality. At the time of this writing a mining pool called GHash.IO is controlling 42% of the Bitcoin mining network. Over the last 4 days this pool has gone from less than 38% of the mining capacity to 42% of the mining capacity.

What can be done to protect the Network?

The short answer is no one is really sure yet. The good news is that the best minds in Bitcoins are discussing the issue now on Reddit. Some of the most reliable miners are leaving GHash.IO for other pools to try and reduce the percentage of the network controlled by this dominate pool. Also, just because a mining pool can create a 51% attack does not mean that it is in the best interest of the pool to coordinate such an attack. In theory a 51% attack would cause a huge loss in confidence of Bitcoins, dropping the value and making their coins and computers less valuable. For now, I suggest everyone watch this chart closely, if it gets close to 50% consider moving at least some of your Bitcoins to Litecoins or Fiat.

Toronto-based KryptoKit announced Sunday that Erik Voorhees, Roger Ver and Vitalik Buterin are joining the company in ownership roles, though it declined to specify their equity shares. All three are prominent members of the Bitcoin community. Vitalik Buterin is a co-founded Bitcoin Magazine. “Vitalik rounds out what is becoming a very diverse and capable team,” Steve Dakh, one of KryptoKit’s co-founders, said in a statement. “As one of the top developers in Bitcoin, he will be a huge asset as we continue to develop and perfect our backend and programming.” Erik Voorhees is a bonafide founded the Bitcoin gambling site, SatoshiDice and sold it last summer for 126,315 bitcoins, then worth $12.4 million and now worth over $1oo million based on Coinbase pricing. Ver and Voorhees will serve as advisors to the company.

Several of my fellow Bit-lievers and I have been recently talking about Bitcoin inflection point and if our favorite money has reached it yet. Can Bitcoin still fail? Can the powers that be squash it out of existence? While there are arguments on both sides, my friend Raj told us a story that he described as the moment he realized that Bitcoins have crossed the inflection point.

A mutual friend of our was recently out getting some pizza after what I can only imagine was a long evening of coding and/or partying. While waiting for his pizza, he realized that he’d either lost or left his wallet at home. Fortunately he did have his smart phone. Luckily for him this was a small, family run pizza shop. Also luckily, the owner was working. Our friend approached the owner and offered to either run home and get money, or give the guy some Bitcoins for the pizza. He half expected the owner to ask what the hell is a Bitcoin, but was pleasantly surprised when the owner said he would be happy to take Bitcoins and that he had a wallet. There was no “We Accept Bitcoins” sign in the window, no fancy Bitcoin card reader, just two people with Bitcoin wallets.

While not near the level of paying for a pizza with 10,000 Bitcoins, my friend’s story shows just how quickly Bitcoins can become a viable option for merchant payments. Pundits often talk about the requirement for merchant adoption to make Bitcoins real money. The real story is that anyone, anywhere, with a smart phone or computer or tablet can accept Bitcoins in a minute, for pizza or whatever else you might need after a late night of coding.